After suffering from the rise of the euro in September (cfr my post from 4 October 2010), BL-Global Flexible EUR’s NAV (net asset value) had a satisfactory last three months of the year. The fund’s 3.8% gain in the fourth quarter allowed it to end the year up 12.60%.
Since the start of the year, the rise of the euro has come back to weigh on the fund’s performance. The euro has risen by around 2% against the dollar and the main Asian currencies, and by nearly 4% against the Swiss franc and the Japanese yen. As a reminder, more than half of the fund’s holdings are in currencies other than the euro, the currency in which the NAV is expressed.
Another factor that penalised the fund in the beginning of the year was its long/short equity strategy. Given the low level of interest rates, the fund tends to invest a large portion of its assets in quality companies and hedge part of the resulting equity risk by selling futures on the US, UK and European indices. This strategy is currently working against the fund. Stock market indices are being driven higher by sectors such as banks and insurance in which the fund does not invest, while the defensive sectors that the fund favours are being overlooked by the markets. By way of example, the chart below shows the performance of four sectors in the Stoxx Europe 600 index since the start of the year: banks, insurance, food&beverage and healthcare.
At the start of October 2010, I wrote that the rebound of the euro and the underperformance of quality companies, which had dragged down BL-Global Flexible EUR’s performance in September, would not last and that fundamentals would get the upper hand again. I think that this will again be the case in the next weeks and months. Events that could, in my opinion, bring about a shift in the currently very positive investor psychology include new fears on the sustainability of the US recovery, a deepening of the European crisis and the reaction of the authorities in the developing countries to inflationary pressures, which are starting to mount in these regions.
In sum, BL-Global Flexible EUR’s investment strategy at the start of this year remains unchanged. The macroeconomic environment remains characterised by major macroeconomic problems and overvalued stock markets on one hand, and, on the other, very low interest rates and - within stock markets - quality companies that are attractively valued and often paying out attractive dividends. This environment will continue to support a long quality / short market strategy. In geographical terms, the growth differential and much better fundamentals continue to favour the developing markets, which is why we continue to give priority to Asia. Finally, we are starting to take advantage of the sharp rise in long-term interest rates to boost our bond holdings in the portfolio.
